Debt/Income Ratio
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after you have paid your other recurring loans.
About your qualifying ratio
Typically, underwriting for conventional loans requires a qualifying ratio of 28/36. FHA loans are less strict, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of gross monthly income that can be spent on housing costs (this includes principal and interest, PMI, homeowner's insurance, property tax, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income that can be spent on housing costs and recurring debt together. For purposes of this ratio, debt includes payments on credit cards, vehicle payments, child support, and the like.
For example:
28/36 (Conventional)
- Gross monthly income of $6,500 x .28 = $1,820 can be applied to housing
- Gross monthly income of $6,500 x .36 = $2,340 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $6,500 x .29 = $1,885 can be applied to housing
- Gross monthly income of $6,500 x .41 = $2,665 can be applied to recurring debt plus housing expenses
If you want to run your own numbers, we offer a Mortgage Loan Pre-Qualifying Calculator.
Just Guidelines
Remember these ratios are just guidelines. We'd be thrilled to go over pre-qualification to determine how large a mortgage loan you can afford.
AmeriBest Mortgage can answer questions about these ratios and many others. Give us a call: 3217777277.